Individual insolvencies in the UK have fallen to their lowest level in a decade, but only days later, a debt purchasing agency predicted a significant rise in household debt.

According to the Insolvency Service, there were 79,965 individual insolvencies in 2015, a reduction of 19% compared to 2014. These insolvencies included 39,993 Individual Voluntary Arrangements (down 23% on the previous year), 24,175 debt relief orders (down 9%) and 15,797 bankruptcies (down 22%). 2015 is the fifth year in succession in which insolvencies have fallen, with lending criteria having been tightened and the general economic climate having improved.

Phillip Sykes, president of insolvency trade association R3, commented:

“It’s welcome that insolvency numbers fell so far from their 2010 peak in 2015. Continuing low inflation and a growing economy have helped people pay down or service debts. The return of real wage growth has put a big debt in insolvency numbers.”

Corporate insolvencies in 2015 totalled 14,629, a fall of 10% from 2014, and the lowest figure since 1989.

However, the good news was tempered by a prediction from debt purchaser Arrow Global that consumer defaults will increase by 17% over the next five years, and that by 2020, 4.7 million households will be in arrears, 700,000 more than at present. If the base rate was 0.5% higher than predicted, then this number would rise by 24% to five million.

The debt to income ratio – a comparison of individual debt repayments against overall household income – has fallen from 145% in 2008 to 120% in 2015, but Arrow Global predicts this will rise to 160% by 2020.

Tom Drury, Chief Executive Officer of Arrow Global, said:

“Low interest rates and reduced lending have led to a fall in the consumer debt burden since the financial crisis. However, the recent upturn in consumer confidence means this trend is ending as overall lending increases and as interest rates rise, defaults will start to increase from their current low levels.

“The rise in the number of individuals in default will make professional debt management all the more important for both lenders and the borrowers in difficulty. The consumer debt industry needs to work closely with advisory consumer bodies now to plan for this rise, so borrowers in difficulty are given the best advice and help in managing their finances.”

Separate figures from the Government’s Office for Budget Responsibility have suggested a 49% increase in unsecured debt levels, equivalent to £8,000 per household, by the end of 2020.

Arrow Global also expects mortgage re-possessions to rise by 9% from 10,400 in 2016 to 11,300 in 2020. Personal insolvencies are predicted to rise 3% by 2020.

Matthew Chadwick, head of personal insolvency (England & Wales) at accountants BDO, said:

“With household debt now at its highest level in four years and real earnings having grown by just 0.7% between January and November 2015, it is unsurprising that debt as a percentage of net household income has risen to over 55%.”
“This situation is unlikely to change in the short term and there is every possibility that real earning increases could fall back into the negative this year. The outlook for many remains difficult.”

“The impact of October’s seven-fold increase in the bankruptcy threshold level has yet to be felt, though could prompt a notable fall in insolvencies this coming year as the threshold alteration is dealt with in the courts.”

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.